Despite small dip, acquisition market 'robust'

The decade may be half over, but the strong run enjoyed by plastics mergers and acquisitions shows no signs of slowing down.

Although the actual number of global plastics and packaging deals fell slightly in 2015 — down about 4 percent to 329, according to P&M Corporate Finance of Southfield, Mich. — the market continued a run of being at 300 or higher every year since 2007. Years with 300 deals previously had been rare, P&M managing director John Hart said.

“We're in a robust market,” Hart explained. “We continue to see a supply/demand imbalance fueled by an oversupply of private equity capital. We've also seen increased strategic buyer activity and more focus on M&A to drive growth.”

Globally, total 2015 M&A deal value for all industries had hit $3.29 trillion by the end of November — already surpassing the $3.29 trillion total of 2014, according to Mergermarket. M&A activity in the United States alone totaled almost $1.1 trillion, according to Bloomberg, up 12 percent vs. 2014.

P&M's research divides the plastic and packaging industries by end markets, sectors and product segments. Consumer was the fastest growing end market for M&A in 2015, surging 52 percent to a total of 44 deals.

Sector M&A growth was led by sheet and thermoforming, up 35 percent to 31 total deals. Among product segments, rigid packaging ballooned 83 percent to include 55 deals.

“The economy has been stable and there's a tremendous amount of cash in the market,” said Bill Ridenour, president of Polymer Transaction Advisors in Wapiti, Wyo. “Private equity firms are asking where to place cash for their investors. They have more money than they know what to do with.”

Private equity firms were involved in 39 percent of global plastics and packaging deals in 2015, up from 32 percent in 2014, according to P&M. The number of deals involving U.S.-based firms — as buyers, sellers or both — fell from 43 percent in 2014 to 37 percent last year.

“There continues to be high demand and strong multiples paid for plastics businesses,” said David Evatz, managing director of investment banking with Stout Risius Ross Advisors LLC in Chicago. “There's a lot of available capital from both strategic and private equity firms, and also strong credit markets and low interest rates.”

In 2016, “there's still interest” in plastics, according to Kevin Mayer, managing director with Western Reserve Partners in Cleveland. “This continues to be a good time to access the M&A market. There's a lot of money on corporate balance sheets.”

Boosting organic growth

The ongoing strength of the plastics M&A market likely is due in part to a continuing trend of businesses using M&A as a means to boost organic growth, especially with U.S. economic growth at around 3 percent annually, with even lower rates being seen in Europe and other spots around the world.

“There's been public corporation profit growth, but slow organic sales growth,” said Ben Whiting, plastics team director at KeyBanc Capital Markets in Cleveland. “Growth also has been affected by currency, and it's not as robust now as it was coming out of the recession. There's no question that M&A has been a way to continue growth.”

Strategic buyers “are looking to supplement organic growth with acquisitions,” added Evatz.

Terry Minnick, owner of Molding Business Services in Florence, Mass., said that although some firms have enjoyed organic growth in recent years, others “have built their entire companies on M&A.

“Organic growth and GDP growth are in the low single digits, so unless a company has a lot of new products, they need to look to acquisitions to get a good growth rate,” explained Andrew Petryk, managing director and principal with Brown Gibbons Lang & Co.

“Companies are trying to buy their way into growth,” Mayer added.

A multiplicity of multiples

Earnings multiples paid for plastics firms also remained relatively high by historical standards in 2015. Ridenour said that, depending on market focus, firms with sales of less than $100 million could go for 4 to 10 times EBITDA, while those above the $100 million sales mark could fetch 5 to 12 times.

“We saw prices creep up throughout the year,” Minnick said. “A company might see a multiple go from 5 to 5.25 or from 5.5 to 6. It's all about market confidence. You don't buy new car if you just lost your job.”

“We're seeing premium multiples paid for top tier assets,” added Mayer. “Above market prices are being paid for companies that are differentiating themselves. They can get one or two turns higher EBITDA.”

Evatz said that multiples seen in plastics M&A in the last couple of years are as high or higher than they were before the recession. KeyBanc also continues to see strong multiples for plastics firms, according to Whiting. “We could see a slight increase [in multiples] in 2016 or see them stay at record highs,” he said.

Other financial pros don't see much room for those multiples to rise in 2016. “The market remains strong, but there's more of a chance of multiples going down than up this year,” said Petryk. “2008-09 was the bottom of the [economic] cycle, so we're 6 to 7 years into a new cycle that usually only lasts 3 to 5 years.”

“We don't expect multiples to go up this year,” added Hart at P&M. “They might level off. It's still going to be a good year, but there's some uncertainty and headwinds for the economy, plus it's an election year. It's hard to look out too far.”

Dark clouds on the horizon?

The possibility that the current economic upcycle might be getting long in the tooth seemed to be on the minds of financial pros interviewed by Plastics News. Several mentioned the possibility of a downturn in 2016.

“We're in a cyclical peak in M&A,” said Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago. “People are looking for something to scare us into a downturn. As we get closer to the election, there could be signs of problems in the economy and that could trigger a downturn in M&A. We could see lower valuations and multiples in the second half.”

“We could see a crack in the economy in 2016,” added Ridenour. “We could be coming to an end in the boom curve.” Minnick said that the economy “might see a bump or a hurdle, but not enough to hurt fundamentals.”

No interest in rate hike

Across the board, financial pros who talked with Plastics News don't expect much of an impact in 2016 from the U.S. Federal Reserve's recent decision to increase interest rates by 0.25 percent. It was the first increase in several years, as the Fed kept rates low to stimulate the economy after the recession.

“There might be some nervous borrowing and banks might be a little more cautious, but there shouldn't be much of an impact,” said Blaige. “The effect on psychology might be a little more.”

The rate increase “isn't likely to have a significant impact,” added Evatz. “There are still a lot of aggressive lenders.”

Petryk pointed out that interest rates “are still very low — it's still an attractive market to borrow money in and still a very inexpensive form of capital.

Big deals

Plastics News reported on almost 70 plastics M&A deals in the second half of 2015. Noteworthy deals included:

• Jarden Corp.'s $1.35 billion acquisition of plastic food service product maker Waddington Group Inc. That deal came a few months before Jarden merged with Newell Rubbermaid — another major plastics processor —to create a consumer products giant with annual sales of $16 billion.

• Plastics packaging giant Berry Plastics paying $2.45 billion for medical products manufacturer Avintiv.

• Faurecia selling its automotive exteriors business to CIE Plastic Ominum for $732 million.

• RPC buying fellow European injection molding giant Global Closure for $714 million.

Many of these megadeals — at least eight plastics-related businesses sold for more than $250 million in the second half — took place in the familiar markets of automotive, packaging and medical —– recent favorites of plastics investors.

Interest remains in each of those three sectors, although some financial pros feel automotive may have peaked, in light of record U.S. production and sales in 2015. “Auto is stable, but it's not a growth market, except maybe in Mexico,” Ridenour said.

“I don't think automotive can grow long-term at its current rate,” added Petryk. “Some of this growth is from consumer confidence coming back and people buying who had delayed purchases.”

Whiting added that packaging “is strong — it handled the recession better than some did — and medical is less cyclical.” Evatz agreed that packaging “is up,” which he said has led to an increase in packaging-related injection molding and thermoforming deals.

“Cyclicals like automotive and building and construction are coming back,” said Blaige. “Non-cyclicals like packaging and medical started to come back sooner.”

And although the construction market has rebounded slowly, Mayer listed it as a growth market for 2016. “Investors are looking at the long term horizon for housing, which could get back to 1.4 million or 1.6 million housing starts in the U.S. in the next few years,” he said.

From a geographic perspective, Mexico and other parts of Latin America continue to draw investors. Minnick's firm last year sold a plastics firm in Mexico to a Japanese buyer. Buying an existing plant, he said, “is less expensive than a greenfield project, which easily could cost $20 million to build and that could lose money for a few years.”

Blaige agreed that Latin American locations such as Mexico, Colombia and Peru remain attractive, but Brazil and Argentina are less desirable because of recent economic struggles.

Time to go?

So if multiples paid for plastics firms are high — but might not get higher in 2016 — does that mean that owners of those companies should be heading for the exits?

“A lot of owners are in their mid-60s and started thinking of selling five or six years ago,” Minnick said. “They buckled down after the recession and made investments, and now those investments are paying off. So you might see small and midsize guys decide to sell.”

Lower stock market returns, however, might lead plastics owners to hold on longer, Petryk said, since the market can't provide superior returns. In spite of that, he added that 2016 is “not only a great time for sellers with valuations, but with purchase agreements with more seller friendly terms.”

Hart advised owners considering a sale to engage in the process early in order to assess the value of their company and their shareholders' needs. “Timing a deal is always the challenging part,” he said. “But it's better to wait months — not years.”